ENRON'S COLLAPSE: THE OVERVIEW

ENRON'S COLLAPSE: THE OVERVIEW; Enron Auditor Raises Specter of Crime

By JOSEPH KAHN with JONATHAN D. GLATER

Published: December 13, 2001

Correction Appended

WASHINGTON, Dec. 12—
Enron's accounting firm told Congress today that the company had engaged in ''possibly illegal acts'' before its collapse and misled its auditors by withholding crucial information.

Enron executives, meanwhile, presented a plan for the company to survive by spinning off its prized energy-trading operation and emerging as a more conventional energy producer and wholesaler.

Joseph P. Berardino, chief executive of Arthur Andersen, Enron's longtime auditor, provided a House panel with the first direct testimony that the company, now bankrupt, might have violated securities laws. He did not specify any violations.

Both the Securities and Exchange Commission and the Justice Department are investigating Enron's demise, which burned investors who once owned Enron stock worth tens of billions of dollars and left thousands of employees unemployed. The S.E.C. went to court today to force Andrew S. Fastow, Enron's former chief financial officer, to testify in its inquiry. It said he had failed to comply with an earlier subpoena. [Page C6.]

Andersen auditors told Enron's board that company officials had withheld information about a so-called special-purpose entity on Nov. 2, Mr. Berardino said. One week later, Enron issued a revised financial statement and reported $586 million in losses connected with such entities, contributing to its death spiral.

Andersen also acknowledged that its auditors had made mistakes in analyzing another of Enron's special-purpose entities, which the company often used to remove debt from its balance sheet. ''We made a professional judgment about the appropriate accounting treatment that turned out to be wrong,'' Mr. Berardino said.

Enron said in a prepared statement today that it had always cooperated with its auditors and that it had been the Enron management, not Andersen's, that ''discovered the arrangement'' that raised questions about the accounting treatment of one special-purpose entity. The company said it had immediately reported the findings to Andersen as well as to an investigative panel of its board.

''Enron is determined to get to the bottom of these issues and began work on that effort before Andersen's advice,'' the company said.

Mark Palmer, an Enron spokesman, conceded that someone at Enron must have known about the Enron information that Andersen said had been withheld and that had forced the change in accounting. But he added: ''It was not known to our chief accounting officer. It was not known to our senior management.''

The quality of the audits is likely to come under close scrutiny because Andersen gave its seal of approval to Enron's financial reports for 10 years, as Enron grew from a medium-size natural gas company to a complex energy trading concern that reported more revenue than all but seven companies in America.

At the hearing, before the House Committee on Financial Services, the first of several House and Senate panels that are expected to inquire into Enron's collapse and its impact on energy and financial regulation, lawmakers said there had been widespread abuses by company executives. Company officials enriched themselves by selling hundreds of millions of dollars worth of stock while they engaged in questionable financial practices that ran the company into the ground, several congressmen said.

Company officials were ''just having too much fun,'' said Representative Richard H. Baker, the Louisiana Republican who presided over the hearings. ''We must make the careful determination of whether we are dealing with a case of outright fraud and violation of existing securities laws,'' he said.

Mr. Berardino of Andersen said he thought that his appearance at the hearing was important to help restore public confidence in the stock market, where investors must trust the quality of financial results certified by the Big Five accounting firms, including Andersen.

''I am here today because faith in our firm and in the integrity of the capital market system has been shaken,'' he said.

Mr. Berardino said the firm was still seeking to learn why it had not been provided information that would have allowed it to account properly for a special-purpose entity called Chewco Investments. Andersen let Enron exclude Chewco's debt from its own books.

He said Enron had kept Chewco off its books by arranging in 1997 for a financial institution he did not identify to invest $11.4 million in it. That satisfied an accounting rule saying that if an unrelated party provided at least 3 percent of the equity, disclosure was not mandatory.

But, he said, Enron had in fact ''arranged a separate agreement with that institution'' in which Enron guaranteed half that amount and put up cash to back that guarantee. Had Andersen known that, he said, the accounting would have been different, and Enron's reported profits in subsequent years far lower.

Mr. Berardino said it had allowed Enron to treat Chewco as an independent entity because it had not known the full scale of the company's financial involvement. ''Important information was not revealed to our team,'' Mr. Berardino said.

But he said it had been Andersen's own ''error in judgment'' that had led to incorrect accounting for another special-purpose entity, LJM Cayman.

In New York today, Enron gathered creditors to present its plans to remain in business. Executives said the company planned to sell its troubled Azurix Corporation water unit and its wind energy business, among other operations that they predicted could raise up to $6 billion. The surviving company would have three primary business lines: pipelines, energy exploration and production.

Enron is in advanced talks to sell a controlling stake in its energy trading unit to one of its financial backers. Wall Street firms like J. P. Morgan Chase and Citigroup, among Enron's largest creditors, are thought to be among those that might want to invest in the trading operation.

''We will do everything we can to maximize value,'' said Kenneth L. Lay, the company's chief executive, as he spoke to more than 100 assembled creditors, bankruptcy lawyers and investment bankers at the New York Hilton. He said he envisioned the company's emerging from bankruptcy proceedings within a year.

Mr. Lay declined an invitation to address the Congressional committee yesterday, but he said he expected to testify in Washington at a later date. ''I couldn't today because of this,'' he said, referring to the meeting with creditors. ''This is the No. 1 priority for the company.''

The trading floor, one of Enron's most prized businesses, is also one of the most fragile because of the risk that employees will leave. It is essential to set up the joint venture quickly, before Enron's traders flee the firm, said Jeff McMahon, Enron's chief financial officer, emphasizing, ''The key here is timing.''

Enron executives, trying to hurry the reorganization process, offered yesterday's presentation -- one of the first opportunities for creditors to hear directly from the company since its bankruptcy filing on Dec. 2 -- even before an official creditors' committee was appointed.

Enron's bankruptcy lawyer, Martin Bienenstock of Weil Gotshal & Manges, urged creditors to withhold judgment on what had driven the company to bankruptcy so quickly. ''Don't assume there's a smoking gun,'' he said, ''because this company was in the forefront of this business.''

Photo: Joseph P. Berardino, chief executive of Arthur Andersen, Enron's longtime auditor, told Congress today that the company may have violated securities laws before its rapid downward spiral, but he did not give specifics. (Carol T. Powers for The New York Times)

Correction: December 15, 2001, Saturday An article and a picture caption in Business Day on Thursday about House committee testimony by the chief executive of the Arthur Andersen accounting firm, on the finances of the Enron Corporation, misstated his middle initial. He is Joseph F. Berardino, not Joseph P.